An Addendum to the ‘Flations – Gold $5,000

Federal Reserve Chairman Ben S. Bernanke delivered a much-anticipated speech on Friday, August 27, 2010. There was no reason to think this talk would be more or less important than his other talks except for the degree of hysteria whipped up by the media in advance. Bernanke was addressing an audience of fellow central bankers and their camp followers at an annual gathering in Jackson Hole, Wyoming. There have been memorable comments at these late summer getaways, such as, in 2005, when past-Federal Reserve Board Vice Chairman Alan Blinder claimed then-current-Federal Reserve Chairman Alan Greenspan might be the “greatest central banker who ever lived.”

But Ben Bernanke said nothing new. The post-mortem analysis of the world’s most influential central banker can be reduced to four of his claims from Jackson Hole:

“The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation.” [Because the economy is noodling along – #4, below.]

“A… policy option, which has been proposed by a number of economists, would have the Committee increase its medium-term inflation goals above levels consistent with price stability.”

“However, such a strategy is inappropriate for the United States in current circumstances.”

“I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace. Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in place.”

In summary, Bernanke’s strategy of inflating is “inappropriate,” given Bernanke’s stated outlook.

Bernanke’s stated outlook is wrong. On August 17, 2010, the Federal Reserve Bank of New York reported $986 billion of “severely delinquent” consumer debt, defined as 90 days overdue. On August 18, the Wall Street Journal published a survey by CareerBuilder.com. Of 4,500 white-collar workers who were asked, 9% had taken a second job in the past year and an additional 19% intended to do so in 2010. This is probably due to constrained income and shrinking access to credit (see The ‘Flations).

At some point, Bernanke’s outlook will be untenable. The Fed chairman is habitually slow to understand changing circumstances, but Dow 5,000 could do the trick.

It looks as though the U.S. Postal Service is prepared. It has listed instructions on its website to convert Priority Mail International insurance from U.S. dollars to SDRs (Special Drawing Rights). SDRs were conceived in 1969 as a possible substitute when the U.S. dollar was chasing U.S. prestige down a rat hole. It originated under the auspices of the IMF (International Monetary Fund) which defines it as “a basket of currencies, today [August 30, 2010] consisting of the euro, Japanese yen, pound sterling, and U.S. dollar.” (The value of the SDR translated into dollars is calculated by the IMF daily “except on IMF holidays and when the IMF is closed for business.” A currency that that takes a lunch break is doomed to fail.)

The U.S. dollar is still the currency that dominates international transactions, although the percentage of trade in other forms of payment has been rising for the past several years. China, Russia, and other countries have attempted to shift settlement into other currencies, including the SDR. This is understandable given how the overpopulation of U.S. dollars around the globe leaves foreign central banks with redundant dollar reserves and another housing bubble.

From the USPS website:

323 Priority Mail International Insurance

323.62 Accepting Clerk’s Responsibility

The accepting clerk must do the following:

a. Indicate on PS Form 2976-A the amount for which the parcel is insured. Write the amount in U.S. dollars in ink in the “Insured Amount (U.S.) block.”

b. Convert the U.S. dollar amount to the special drawing right (SDR) value and enter it in the SDR value block. For example:

INSURED VALUE
$100.00 (U.S.)
65.76 SDR

c. See Exhibit 323.62 for a table showing the conversion of U.S. dollar values up to $600 to SDR equivalents. To determine SDR equivalents above $600, multiply the insured amount, rounded up to the next full dollar, by the conversion factor of 0.6576.

Note: Use the following rates when converting between U.S. dollars and SDR values:

1 U.S. $ = 0.6576 SDR
1 SDR = $1.52 ($1.5206 U.S.)

The world has operated on the U.S. Dollar Standard since America defaulted on the Post-World War II Gold-Dollar Standard in 1971. Has the U.S. Dollar Standard ended? If it has not, Simple Ben’s intention to inflate the United States to prosperity will do the trick.

If “USPS Updated Postal Revision Through July 15, 2010, Section 323.62” has been discussed in the major media, it must have been in the Society pages. The website Zero Hedge carried the story last week. Whatever its chances of adoption, it certainly deserves more debate than the boring and trivial analysis of a boring and failed economist who has stated his intentions to hyperinflate for the past 30 years. Maybe a mole from the IMF infiltrated the USPS. Accentuating the trivial and ignoring imminent cataclysms is the story of our times.

Mr. Sheehan was Director of Asset Allocation Services at John Hancock Financial Services in Boston. In this capacity, he set investment policy and asset allocation for institutional pension plans. For more than a decade, Mr. Sheehan wrote the monthly "Market Outlook" and quarterly "Market Review" for clients.

He is a frequent contributor to Marc Faber's "Gloom, Boom & Doom Report." He also has written articles for "Whiskey & Gunpowder" and the Prudent Bear website, among others. He currently serves as an advisor to an investment firm and a non-profit foundation.

A Chartered Financial Analyst, Mr. Sheehan is a graduate of Columbia Business School.